Abe has deflation in cross-hairs

Japan’s incoming Prime Minister,
Shinzo Abe
, backed the central bank when it raised interest rates in 2006, a move he now says was a mistake. His new premiership may show less tolerance for deflation.

Mr Abe, whose party swept to victory in elections for the lower house of Parliament on Sunday, will have the chance to reshape the Bank of Japan next year, when the terms of its governor and two deputies expire.

He said he told central bank governor Masaaki Shirakawa on Tuesday that he wanted an accord with a 2 per cent inflation target. The BoJ is forecast to boost its asset purchases as soon as Thursday.

“This is one of the most important monetary policy events for 2013," said Bruce Kasman, chief economist at JPMorgan Chase. “It could potentially be similar to the major change in US monetary policy after the appointment of Paul Volcker."

American policymakers by the late 1970s recognised the broader costs of inflation to competitiveness and ­productivity, and backed then-Fed chairman Volcker’s efforts to contain it. Any similar shift by Japan with respect to ending deflation would diminish incentives to save and make it more attractive to borrow, a recipe for faster growth.

Unemployment among those aged 15-24 was 7.5 per cent in October, compared with an unadjusted overall rate of 4.1 per cent.

The yen is still stronger than the 100 yen per dollar that Nissan chief executive Carlos Ghosn said was the currency’s “neutral range".

“We have to get the economy out of deflation, correct the strong yen, create jobs and boost growth," Mr Abe said on Monday at a press conference. “That’s our mission."

He made increased co-operation between the government and the central bank a centrepiece of his campaign, saying at one stage that the BoJ “made a mistake" in stopping quantitative easing amid signs of ­economic recovery in 2006.

“The most important lesson Abe must have learned was that the economy matters for his popularity," said Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch. “Pushing the central bank may be the easiest solution for now due to the debt burden and because deregulation takes too long to realise."

Since Mr Abe quit in September 2007, the Nikkei has fallen by around half as the yen has gained about 40 per cent against the dollar, while public debt has grown by a fifth.

“There is a limit to what monetary policy can do," said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo. “The government must try harder to help companies. Expectations on monetary policy are building up in the market but Japan’s economy needs the government to address lowering growth expectations in a rapidly aging society."

Two former private-sector economists on the BoJ’s nine-member board show signs of favouring more aggressive stimulus, giving Mr Abe the chance to push for a pro-easing majority. “This is going to be Abe’s revenge," said Kazuhiko Ogata, chief economist at Credit Agricole. “He has rock-solid determination to push the BoJ for more stimulus."